A large store is deciding whether to install a machine in each of its store Each machine costs $250,000 Projected income per machine is as follows Year 1 2 3 4 5 Sales 200,000 300,000 300,000 250,000 250,000 Operating Expenses 200,000 200,000 200,000 200,000 200,000 Depreciation 50,000 50,000 50,000 50,000 50,000 Accounting Income 0 50,000 50,000 0 0 Why would the store continue to operate a machine in Years 4 and 5 if it produces no profits What are the cash flows from investing in a machine Assume each machine is completely depreciated and has no salvage value at the end of its 5 years life Show all your workings and justify your answer

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Question: A large store is deciding whether to install a machine in each of its store. Each machine costs $250,000. Projected income per machine is as

A large store is deciding whether to install a machine in each of its store. Each machine costs $250,000. Projected income per machine is as follows:

Year

Sales

200,000

300,000

250,000

Operating Expenses

200,000

Depreciation

50,000

Accounting Income

50,000

Why would the store continue to operate a machine in Years 4 and 5 if it produces no profits? What are the cash flows from investing in a machine? Assume each machine is completely depreciated and has no salvage value at the end of its 5 years life. Show all your workings and justify your answer.

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